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Competition, globalization and the decline of inflation

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Chen, Natalie, Imbs, Jean and Scott, Andrew (2004) Competition, globalization and the decline of inflation. Working Paper. Centre for Economic Policy Research, Coventry. (Unpublished)

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Abstract

We investigate theoretically and empirically the competitive effects of increased trade on prices, productivity and markups. Using disaggregated data for EU manufacturing over the period 1988-2000 we find increased openness exerts a negative and significant impact on sectoral prices. Increased openness lowers prices by both reducing markups and raising productivity. In response to an increase in openness, markups show a steep short run decline, which partly reverses later, while productivity rises in a manner that increases over time. Our estimates suggest that EU manufacturing prices fell by 2.3%, productivity rose by 11% and markups fell by 1.6% in response to the observed increase in manufacturing imports. The direct price restraint caused by greater imports, assuming unchanged monetary policy, can explain a fall in inflation of up to 0.14% per annum. The most substantial impact on inflation arises, however, from the role of lower markups in reducing the inflation bias of monetary policy. Our results suggest that increased trade could account for as much as a quarter of European disinflation over this period.

Item Type: Working or Discussion Paper (Working Paper)
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HC Economic History and Conditions
Divisions: Faculty of Social Sciences > Economics
Series Name: CEPR Discussion Paper
Publisher: Centre for Economic Policy Research
Place of Publication: Coventry
Date: October 2004
Number: No.DP4695
Status: Not Peer Reviewed
Publication Status: Unpublished
Access rights to Published version: Restricted or Subscription Access
Version or Related Resource: Published version appears in WRAP (http://wrap.warwick.ac.uk/28582/)
Related URLs:
URI: http://wrap.warwick.ac.uk/id/eprint/44613

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